Why I Handed Over 30 Percent of My Company to My Employees

By Ken Baker, CEO, NewAge Industries, Southampton, Penn.
My father founded NewAge Industries in 1954. The company manufactures rubber and plastic tubing, hoses and fittings. I've been working here almost my whole life.

Now, NewAge has 100 employees, and I've taken over as CEO. Even though we've grown to $30 million in revenue, I still want to maintain that family business atmosphere. So, I thought, why not make all of the employees co-owners of the company?

Building commitment
We first experimented with a profit-sharing program back in 1993: We would share a portion of the company's profits with all of the team members on a quarterly basis. They became more passionate about their work, but I felt that I would never get the level of commitment I wanted unless I gave the employees ownership of the company. I also wanted an opportunity to reward the long-term members of the organization -- some employees have worked here for 25 years.

I thought that making the company employee-owned would also be a great help in recruiting: If all other benefits are equal at two companies, a candidate will take an offer that gives her an ownership stake.

So in 2006, I implemented an employee stock ownership plan (ESOP) and passed 30 percent of the company's stock over to the employees.

Employee ownership
We currently have $5.2 million in the ESOP, which is split between 100 employees based on salary level. Employees need to be vested for five years to receive a full share and they aren't able to cash out the shares until retirement. Once a year, we have the company independently evaluated to see what the shares are worth.

When team members leave or retire, they sell their shares back to the company, giving new employees the opportunity to become shareholders. I'm also planning to allocate more shares out of the 70 percent that isn't yet employee-owned.

One major benefit of the ESOP is that it's tax-free to a certain limit. We don't pay any scheduled corporate tax or income tax on the portion of the company that is employee-owned. This actually saves us money.

Everyone has a voice
Now that all of our team members are shareholders, I hold regular meetings to discuss our company strategy. It's very transparent: I lay out all the numbers that reflect our recent performance. We go over gross margins, new products and strategic planning, and discuss what our top customers are looking for. I want employees to know what's going on within the company, and to think about how they can impact the organization to make the share prices go up.

This isn't a democracy -- I keep one hand on the tiller -- but it's a very collaborative environment, and I'm willing to listen to suggestions. Everyone feels like they have a voice in the process.

I think the ESOP has helped shift employees' mindsets to thinking about their work as a career, rather than just a job. Now that they're literally invested in the company's success, they take more pride in the work that they're doing, whether they're manufacturing tubing, answering phones or shipping supplies. It's made a difference at every level.

We're on our seventh year of record sales, up 35 percent this year from last year. It's tough to tell whether our success is because of the ESOP or any other number of factors, but I think customers realize that dealing with NewAge is a lot different from dealing with our competitors. We have better customer service and attention to detail -- as a customer, you can tell when someone is really committed to making you happy.

Keeping it in the family
One of the main reasons I decided to create the ESOP was to discourage a corporate buyout. I know some small companies like ours are eager to get snapped up, but in my eyes, it's really bad for the business. When large companies buy small companies, they slice and dice them, they move them and they lay off most of the staff. They're basically just buying the brand name, patents and intellectual property. Most of them -- at least within our industry -- don't really care about the people who work for the company.

By giving the employees such a large share of the business, our company becomes much less attractive for a big company buyout. I don't believe in layoffs -- they cause unbelievable damage to both the company and the community. The ESOP provides job security to all of my employees, and keeps the company within the extended family that we've created here.

Ken Baker began working for NewAge Industries at age six, when he helped collate the company's brochures at the dining room table.
-- As told to Kathryn Hawkins

Resources:

• Learn how an ESOP works.
• Peruse a list of America's largest employee-owned companies.
• If you implement an ESOP, teach your employees what it means to be a shareholder.